What can financial services firms do to ensure transparency, accountability, and better oversight over potential money laundering?
The Pandora Papers, which brought to light revelations from nearly 12 million leaked confidential financial records, revealed the concealed wealth of powerful public figures around the world. How do they hide their money, and why is this information important? Thomson Reuters Institute (TRI) spoke with Chip Poncy, partner and Global Co-Head of Financial Crimes Risk Management at K2 Integrity for his take on the situation.
TRI: What impact has the Pandora Papers had in exposing global corruption?
Chip Poncy: The revelations from the Pandora Papers are not entirely surprising, but still a big deal. We have seen leaks like this in the past — as recently as the FinCEN Files and, of course, the Panama Papers. It is hard not to be shocked at how prevalent the exploitation of bad actors is and how difficult it is to deter them. It is a reminder of the depth and extent of global corruption and of the pervasiveness of the problem.
Specifically, the Pandora Papers have highlighted issues of enablement in the U.S. and have brought into focus how policies on increasing the traceability, transparency, and accountability regarding sources of wealth and beneficial ownership must be strengthened — particularly through corporate vehicles. Prior leaks have shone a light on foreign tax havens, but the Pandora Papers have displayed clear issues in the U.S., particularly with respect to the lack of beneficial ownership information or related diligence in our country’s trust and company formation processes.
TRI: What steps can be taken to ensure transparency, accountability, and tighter control over financial transactions and money laundering?
Chip Poncy: In the U.S. specifically, there are three primary initial steps that we should take.
First, get a handle on abuse of shell companies. In December, the FinCEN announced a proposed rule implementing the Corporate Transparency Act (CTA), providing a preview of the agency’s approach to developing a national registry of beneficial ownership information so that we end the practice of creating anonymous companies in the United States.
Second, dig into the real estate sector. While real estate serves as a legitimate mechanism for investing wealth, it is an area where transactions can be described as opaque. FinCEN’s advanced notice for proposed rulemaking for real estate transactions is a step in the right direction. It seeks to increase transparency and invites comment on imposing reporting requirements on certain persons participating in real estate transactions.
Finally, enforce the rules we have on the books. We are seeing this for banks specifically — it is not just about issuing new rules, but we need more discipline in implementing and enforcing existing ones. The Customer Due Diligence (CDD) Rule came into effect in 2018, and yet the ability for illicit actors to penetrate the U.S. financial system through shell companies and other vehicles shows that effective implementation of the CDD Rule by the financial sector is far from complete.
We’ve been working closely with corporations and real estate professionals impacted by these newly proposed rules, as well as financial institutions that are anticipating follow-on revisions to the CDD Rule, as they all seek to better understand, manage, and mitigate the corruption risks they face in their business.
TRI: How does the Corporate Transparency Act factor into all of this? Is it a step in the right direction, or do we need something more?
Chip Poncy: Yes, it is a step in the right direction, standing on the shoulders of 20 years of global standard-setting and domestic policy drafting. The general public has an awareness of the need for greater transparency in the financial system, and this brings us closer by providing transparency to companies created in the United States and banking across the global financial system.
Like the CDD Rule, however, the key element to determine efficacy is how the new rule is ultimately crafted and implemented in practice. There are many core questions that are still awaiting answers from the rulemaking process: Who is required to report? How is information reported? How is information verified and updated? Once those questions are answered, we will have a regulation in place that enhances transparency around company formation — in a manner that complements the CDD Rule.
We are advising legal entity clients to begin taking steps — if they’re not already doing so — to document and be prepared to provide the beneficial ownership information specified in the proposed rule. Even if your company does not technically qualify as a reporting entity, be sure to have your organizational structure well documented to stay ahead of reporting obligations in the future. These obligations should substantially reflect what companies already need to produce to open a bank account, whether in the U.S. or in any financial center adherent to global standards governing customer due diligence obligations.
TRI: Focusing on the United States, the Pandora Papers revealed 206 U.S.-based trusts in 15 different states that held assets of more than US$1 billion. Several states — Delaware, Florida, South Dakota, Nevada and New Hampshire — have emerged as global hotspots for those seeking to hide their assets and minimize their tax burden. What can the U.S. government do to close these secrecy loopholes?
Chip Poncy: One thing I want to make clear is that to win in this fight against corruption, it is not just up to the government. Everyone has ownership. However, the U.S. government is very much aware of these issues and issued a Government-Wide Strategy on Countering Corruption that outlined how the U.S. seeks to deter corruption both at home and abroad. The CTA is part of that broader strategy and will help close loopholes within the U.S. financial system by preventing bad actors from abusing legal entities, particularly anonymous shell companies.
Going a step further, the U.S. government can do more to provide clarity around best practices for dealing with higher risk legal entities and for identifying those that may be owned or controlled by politically exposed persons and others presenting heighted corruption risks. However, much of this is going to be reflected in the continued release of regulations from the AML Act of 2020 and forthcoming company formation reforms.
The reality is the government and the private sector, including financial institutions, legal entities, and gatekeepers to the financial system, need to come together to make progress in tackling global corruption.